Where Have all the Foreclosures Gone?

There’s something missing from the nation’s foreclosure capital. It seems that while no one was looking all of the Nevada foreclosures have disappeared. Has the market finally absorbed all of the delinquent homes so that markets can return to some semblance of normality? Hardly. You can thank a new state law – with a wave of a magician’s ward, and a quick abracadabra, the overabundance of foreclosures have gone poof.

In the last legislative session in Nevada a bill with an innocuous sounding name, AB 284, was passed. The bill became law last October and foreclosure activity plummeted. (LA Times Article) The new regulation required that lien holders do something radical before they could commence proceedings to take back a home – they actually had to prove they had the right to do so. This is a legislative requirement that lenders “produce the note” before being allowed to proceed. It sounds easy but with the way mortgages are sliced, diced, and sold it can actually be a difficult thing to do. The paper trail of a mortgage can wander quite a long way from closing room to courthouse.

Buyers Howl

Initially the drop in activity was thought to be temporary as lenders adjusted to the new rule. Here we are six months later activity is still low. There wasn’t much o a problem at first because there were quite a few REO properties available. Lately buyers and real estate agents have been singing the blues because there aren’t enough homes to go around. This seems to have squashed the myth of the so-called “shadow inventory.” If banks really were holding back inventory they would be jettisoning it now.

Looking at the raw numbers may give the impression that there are plenty of properties on the market; when you look at available inventory it’s a different story. What inventory is available is often subject to fierce bidding wars between cash buyers. This competition hasn’t produced higher prices – yet. Word on the street is that upward pressure is there and may show itself as the summer buying season gets underway. There is still a pent up supply of retail sellers who have been reluctant to sell because of the low prices, as numbers climb higher more of those sellers will reenter the market. Supply and demand requires that either more people opt to sell or prices will have to climb.

Short Sales are King

What has happened is that banks are much more willing to entertain short sales. That seems to have been the intent of the law. Real estate agents and buyers who have been doing this type of transaction all along now have a leg up on those who had been focusing on foreclosures. Investors need to adapt to the changing market and move from the courthouse steps to the negotiating table. The short sale process is moving much quicker than before as banks have been forced to embrace the idea.

The results of Nevada’s statute may inspire other states to follow suit and enact similar legislation. For investors who may have been reluctant to consider short sales because of its inherent problems it may be time to reconsider that position. Investment success often comes from being ahead of the curve.

A study of economics usually reveals that the best time to buy anything is last year. – Marty Allen

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14 Comments

Something I don’t understand, will prices go up if appraisers have no incentive to appraise higher? Even if a house has competition for it, if it doesn’t appraise over list, does it even matter? Just curious.

Almost all of these properties are being sold to cash buyers, many of them from out of state. With no mortgages involved appraisers are irrelevant. When houses are placed on the market they typically see multiple bids and are sold for prices above the asking price.

Banks have difficulty following their own paper trail. While they no doubt own the notes, they must produce it before they can foreclose. It is fairly common for owners to skip a year or more of payments before the banks take the home back. I haven’t seen hard numbers to back it up, but word is that that timeline is getting longer. That’s why the banks here are suddenly eager to do short sales and even providing delinquent homeowners with cash incentives at closing.

You don’t know where the top or bottom of any market is until it has passed. For every person saying it will fall further there is another saying buy now. The number of out-of-state cash buyers would seem to indicate that they perceive value here. The summer buying season should tell us a lot about whether we have turned the corner.

Hey Richard — Good stuff, as usual. I just addressed this topic recently, elsewhere. What legislation can’t do, at least they haven’t figured out how yet, is eliminate the 4-6 million homes still in play. Whether already lender owned or any of the several other stages on the way to that status, they’re still there.

Wondering how investors paying more than list price via bidding wars have managed to ignore this elephant in the room? There is no real estate recovery ’til that pachyderm leaves the room.

You know better than anyone that all markets are local. Sure, they’re influenced by the national market, but if the value is there people will buy.

The thing here is that the available inventory is very low. When you look at how many listed properties are tied up in short sales or how many REOs haven’t moved through the bank bureaucracies there aren’t enough properties to go around. Many realtors I know have more cash buyers than they have inventory for. What I waiting to see is how many retail sellers put their homes on the market now. So many of them have been sitting on the sidelines even though they would like to sell.

You bet it will. MERS has been successfully done in. Gotta believe though, that lenders, in concert with politicians will find a way to get around the note problem. When that happens, in whatever form, the dam will break. It might be at that point those who’re paying over list now, may regret their decisions.

Talk about a screwed up market. Nevada is merely the first to be so legislatively aggressive.

Great blog post and very timely indeed. It seems as though this problem, that I started talking about almost a year ago now, has truly reached nationwide levels. While I would agree that there seems to have been a pendulum shift towards short sales, let’s keep two things in mind:
1. States like Maryland in their infinite short sightedness passed a very strict (yes, jail time) law regarding how investors can deal with owner occupants in foreclosure. Your state may be similar.
2. Jeff Brown brings up an excellent question: What about all the crap the banks have on their books NOW? Forget about the in-process junk. What about the houses they own? Where are they?

I see a bit of this in the Florida market. People are listing their homes as short sales, but way above market, yet still below what they owe. My most recent incident, the owners were negotiating a higher priced short sale, yet still way below what they owed!

Banks seem to be more lenient with those trying to sell their homes and homeowners are trying to sit longer without paying monthly housing.

I agree with the comment that this has become a political issue. There must have been an
arrangement between the Obama administration and the mortgage holding companies to
not release most of these foreclosures until after the November election. As we see more
funny numbers with the unemployment figures coming out, all we are seeing is a false reading of what is a bigger problem in the housing market. I consistently see these phony articles by economists that the housing market is getting better. But these people are living in a vacuum that has been dictated by the powers that be. Are you seeing the same thing that I see?